The Mergers & Acquisitions Review: Qatar
Overview of M&A activity
During the past year, the covid-19 pandemic has unsurprisingly affected M&A activity both in the domestic market and in respect of outbound investments.
In the local market, following the merger of Barwa Bank and International Bank of Qatar in 2019, on 30 June 2020, Masraf Al Rayan and Al Khaliji Bank jointly announced that they had entered into initial negotiations regarding a potential merger of the two banks, in a sign that indicates that mergers of Qatari banks and financial institutions are continuing.
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General introduction to the legal framework for M&A
i General overview of the legal system
In accordance with the 2004 Constitution, Shariah law is the primary source of Qatari legislation. In addition, legislation is based on the Civil Code2 and the Commercial Law.3 The Civil Code gives natural and legal persons the freedom to agree on all matters, without limitation, provided that their agreement does not conflict with the law, public policy or morality. The Commercial Law regulates commercial activities, business agencies, commercial concerns, trade names and commercial contracts in general. The Commercial Law also regulates banking transactions, bills of exchange, promissory notes and cheques, and provides a first set of substantive provisions regarding bankruptcy under Qatari law.
ii Other legal frameworks
While they see very little M&A activity, the Qatar Financial Centre (QFC), established by Law No. 7 of 2005, the Qatar Science and Technology Park (QSTP), established by Law No. 36 of 2005, and the Qatar Free Zones Authority (QFZA), established by Law No. 34 of 2005 as amended by Decree Law No. (21) of 2017, provide additional legal frameworks for companies in Qatar, with considerable advantages.
Companies licensed by the QFC are subject to a separate set of rules and regulations that enable them to enjoy various commercial benefits related to M&A. However, given that most QFC firms are subsidiaries or branches of parent companies, there is rarely any M&A activity at the level of QFC entities. This trend could change, given recent developments at the QFC, with a noticeable increase in newly incorporated holding companies and special purpose vehicles that could be involved in M&A.
Similarly, the QSTP is a free zone, affiliated with Qatar Foundation, designed to promote and support research and development, technology and the investment activities that serve the objectives of the QSTP. It has rarely seen any M&A activity, given that its members are largely international companies.
The QFZA acts as a regulator for free zones in Qatar and aims to attract foreign direct investment in the free zones as well as encouraging domestic investors to expand internationally. Companies can be established in the free zone areas pursuant to the Free Zones Authority Companies Regulations 2018 and are thereafter regulated by the QFZA. The QFZA's legal framework is relatively new and is still in the process of being fully established.
iii Corporate law
M&A activity is primarily governed by the new Companies Law.4 It is also regulated by the Qatar Financial Markets Authority's Law No. 8 of 2012, as amended, and by the Law Regulating the Investment of Non-Qatari Capital in Economic Activity (New Foreign Investment Law).5
Under the Companies Law, a company can have multiple forms. The two most widespread types of companies in Qatar are the limited liability company (LLC) and the joint-stock company (JSC) in the form of a private JSC.
iv Private acquisitions
Under Qatari law, a merger occurs when one company is merged into another company, or one or more companies are merged into a new company. The merger contract will contain terms providing for, inter alia, an evaluation of the liabilities of the merged company and the number of shares allocated to the capital of the merging entity. The merger shall only be valid if previously approved by the competent corporate bodies of the companies involved, in accordance with the respective articles of association (articles). Mergers in Qatar are rare, and the merger provisions of the Companies Law are consequently infrequently invoked.
The Companies Law provides that a company can split into two or more companies, whereby each company will be deemed an independent legal entity and can take on any of the legal forms mentioned in subsection iii.
A demerger must be approved by a decision issued by the extraordinary general assembly (EGA) of the company, with the favourable vote of shareholders representing at least 75 per cent of the share capital. The resolution for demerger should outline the names of the shareholders and their shareholdings, the rights and obligations in respect of all the companies resulting from the demerger, as well as the manner by which assets and liabilities are to be distributed among them.
In the event that the shares of the company to be demerged are traded on Qatar's main stock exchange, the Qatar Exchange, the shares of the companies resulting from the demerger shall be tradable upon issuance of the demerger decision.
Finally, it is important to note that the Companies Law allows shareholders that voted against the demerger to exit from the company. However, no further details are provided for in the Companies Law regarding the exit process.
An acquisition will only be deemed valid if the following requirements are met:
- the acquiring company and the target company must each issue a resolution by their respective EGA approving the acquisition and setting out the waiver of the right of first refusal of existing shareholders: these resolutions are to be certified by the Ministry of Commerce and Industry;
- the acquiring company must issue a resolution to increase its capital and thereafter allocate that increase to the shareholders according to their shareholdings in the company, in accordance with its articles;
- completion of the procedures to transfer ownership of the shares of the target, which will not be opposable until the shares are duly registered in accordance with the provisions in the Companies Law;
- if the acquisition is a buyout, the acquiring company must pay the value of the shares and deposit the shares in a special account to distribute them to the shareholders that were registered at the time the EGA approved the sale of shares;
- if the acquisition was made through a share or bond conversion, the acquiring company must submit those shares or bonds to the target for the target to distribute them to the shareholders that were registered at the time the EGA approved the acquisition;
- the target must amend its constitutional documents, including the articles, and elect a new board of directors accordingly; and
- the acquiring company must take all necessary measures to preserve the rights of the minority shareholders, including offering to purchase the stock or voting rights of the minority shareholders for a value not less than the value of the stocks or shares covered by the acquisition, or the value determined by an expert in accordance with the provisions of the Companies Law.
v Public M&A
Overview of the Securities Market Regulation
The Qatar Financial Markets Authority (QFMA) is governed by Law No. 8 of 2012, which establishes the rights of the QFMA to regulate takeovers and mergers of public companies. The relevant rules and regulations issued by the QFMA are the Mergers and Acquisitions Rules of 2014, discussed in further detail in Section III. Although it was initially not mandatory for listed companies to comply with the Corporate Governance Code (CG Code), the version issued by the QFMA in 2016 operated a comply or clarify principle. However, the most recent version of the CG Code makes it of compulsory application to listed companies.
The QFMA rules and regulations provide specific listing, disclosure and notification requirements for listed companies.
vi M&A in certain regulated industries
While M&A activity is generally conducted in accordance with the above-mentioned steps, certain regulated industries provide for particular processes.
The financial sector
The Qatar Central Bank (QCB) is governed by the QCB Law,6 which details the mechanism for the merger of financial institutions, subject to the thresholds and procedures set out in the Companies Law and the restrictions set out in the New Foreign Investment Law.
Under the QCB Law, two or more financial institutions can merge in one of two ways: two or more companies can merge into a new company or the target can merge into the acquirer. In both cases, the following steps must be taken:
- approval of the QCB for the merger is required;
- a preliminary agreement, or plan of merger (called an initial agreement under the QCB Law), must be signed by the parties;
- prior to signing such an agreement, a full due diligence review must be undertaken; and
- an application for the merger containing certain documents and information must be submitted to the QCB, following which the Governor of the QCB has 60 days to issue a decision approving or rejecting the merger. That decision is appealable.
In addition, the QCB Law imposes the creation of committees at the level of the companies intending to merge, on which the QCB must be represented. The exchange of information between the merging companies is also strictly regulated: any exchange requires prior approval by the Governor of the QCB, and the content of the exchange and the identity of its recipients are restricted.
A merger can be imposed by the QCB on any financial institution facing problems that have a fundamental effect on its financial condition.
The QCB Law does not shed much light on the legal framework governing acquisitions of financial institutions, but addresses the issue in a single provision requiring the approval of the QCB on any acquisition, pursuant to the terms and conditions set by the QCB, and applying the benefits and privileges granted under the merger provisions to any such acquisition. In practice, it seems that the QCB is applying the acquisition provisions of the Companies Law as set out in subsection iv.
The telecommunications sector
Legislation in the telecommunications sector consists of various laws and regulations. The main governing act is the Telecommunications Law (Telecom Law).7 As the regulator of this sector, the Supreme Council for Information and Communication Technology (formerly known as ictQATAR and currently known as the Communications Regulatory Authority (CRA)) plays a key role.
The Executive By-Law for the Telecommunications Law (Executive By-Law)8 and various CRA notices and instructions, including the 2011 instruction regarding the calculation and payment of the licence fee and industry fee, and the 2012 Radio Spectrum Policy, have helped shape the sector.
The Telecom Law grants discretionary power to the CRA regarding changes of control. Under Article 13, the Executive By-Law also requires approval by the CRA if an individual licence is assigned to another person, where the term assignment includes a transfer of the licence or a change of control of a licensee.
Finally, the target company must deliver to the CRA written notification of an intended transaction no later than 60 days prior to the intended completion date of the transaction.
Strategies to increase transparency and predictability
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Developments in corporate and takeover law and their impact
Since 2014, public takeovers have been governed by the QFMA's Merger & Acquisition Rules (M&A Rules), which provide a comprehensive, albeit complex, legal framework for public takeovers.
i The M&A Rules
The M&A Rules have a wide scope of application, since they generally apply to all acquisitions or mergers where one of the parties is a listed company in Qatar (direct acquisitions) or a subsidiary of a listed company (indirect acquisitions).
With the exception of a few provisions, including certain disclosure obligations, the M&A Rules do not apply to acquisitions or mergers performed outside the state of Qatar, or indirect acquisitions, provided that the subsidiary of the listed company has conducted business activities in the past three years.
Notwithstanding this exemption, listed companies are required to comply with certain (rather substantial) disclosure obligations, both prior to an acquisition or merger, with respect to indirect acquisitions, and immediately upon approval being granted by the regulators of the offeree company with respect to acquisitions or mergers implemented outside the state, and at completion of the transaction in both cases.
In particular, with regard to pre-completion obligations, listed companies are required to disclose certain information to the QFMA and the market, including:
- details of the offeror, the offeree company (i.e., the target), the major shareholders (i.e., shareholders owning 5 per cent or more of the share capital of a company), and the directors and senior executives;
- with respect to indirect acquisitions only, details of the subsidiary, its business and the degree of dependency on the listed company;
- details of the minimum and maximum number of shares that can be acquired under the offer;
- the offer price;
- the purpose of the acquisition or merger;
- the envisaged timetable;
- an indication of the consequences that the offer may have on the financial position of the listed company and its shareholders;
- the advantages and disadvantages possibly arising from the acquisition or merger; and
- the disclosure of any conflicts of interest among the offeror, the offeree, their independent advisers and 'any person having a relationship with the acquisition or merger' (collectively, concerned persons), the members of their respective board of directors or major shareholders.
Immediately upon completion of an acquisition or a merger, listed companies are required to provide the QFMA and the market with a statement setting out the outcome of the transaction, including an indication of the actual percentage and value of the shares that have been acquired (to rectify any differences or discrepancies with the information disclosed in the previous communication mentioned above), and the effects of any difference on the content of any such previous disclosure. In addition, listed companies have to submit to the QFMA the execution copy of the merger or acquisition agreement.
Finally, the M&A Rules provide that if the procedures for the implementation of the acquisition or merger are not completed (it is not clear whether partial completion would be carved out), presumably within the timeline indicated within the timetable outlined below, a listed company is required to notify both the QFMA and the market of the reasons for this, and provide information as to whether it is expected that the situation will be temporary or final. Again, the M&A Rules appear incomplete, as they do not offer guidance on the triggering event of this disclosure obligation, nor specify the period within which this obligation must be complied with.
Intention to launch an offer, application, timetable and offer document
The M&A Rules require listed companies to immediately disclose to the QFMA and the market the intention to submit an offer, as well as any initial understandings with relevant parties concerning the offer. We believe that such a disclosure could not be made efficiently (without otherwise adversely affecting the outcome of the offer) prior to having reached a fair degree of certainty in respect of the actual intention to launch an offer.
Following that disclosure, the offeror is required to submit to the QFMA the following main documents: an application for the acquisition or merger, an offer document and a timetable for the implementation of the acquisition or merger (collectively, documentation).
The M&A Rules require the offeror to submit to the QFMA a proposed timetable for the acquisition or merger within two weeks of the date of disclosure of the initial agreement concerning a potential offer. The timetable must include the time frames in relation to:
- submission of the final offer document to the QFMA for approval;
- approval of the shareholders (as applicable); and
- proposals with respect to relevant dates, including:
- the first permitted closing date of the offer;
- the date on which the offeree company may announce its profits or dividends forecast, asset evaluation or proposal for dividend payments;
- the date for the public announcement of the offer;
- the final date for meeting all conditions; and
- the final date by which to pay the relevant consideration to the shareholders of the offeree.
The M&A Rules do not provide guidance or further details in respect of the above-mentioned dates, and their actual meaning in this context is therefore unclear. The QFMA must be notified immediately if it becomes apparent that the offeror or the offeree is unable to comply with the timetable.
Applicable time periods
The offeror is required to provide the QFMA with the documentation at least 30 days prior to the date of the meeting of the EGA held to approve the offer. The offeror is also required to provide the shareholders with the offer document within three days of the QFMA's approval of that document and at least 15 days before the date of the EGA meeting.
Unless the QFMA extends this period, the offeror must implement the offer within one month of the date on which the offer has been approved by the EGA, or of the date of approval of the offer document by the QFMA if the EGA has not been held.
During the offer period, listed companies are required to disclose (presumably to the QFMA and the market) any dealings of major shareholders concerning the securities that are the object of the offer. These include details of any person who, individually or jointly with minor children, a spouse or with others owns or becomes the owner of 5 per cent or more of the shares in the offeror or the offeree.
A listed company is required to submit an acknowledgment to the QFMA confirming that completion of the acquisition or merger has occurred.
Any person, acting alone or in concert with others, will need to submit a purchase offer for the entire share capital of a company if it acquires more than 30 per cent of the share capital of the listed company, or 30 per cent in addition to 3 per cent of the share capital of the listed company acquired through the market.
In addition, every person who owns or intends to own, whether individually or with other persons, more than 75 per cent of the shares of the offeree company (relevant stake) is required to notify the QFMA thereof and submit a mandatory offer to buy all the remaining securities (mandatory offer). The mandatory offer must be launched within 30 days of the date on which the holding of the relevant stake is achieved. It is therefore unclear how (if at all) the obligations in relation to the mandatory offer apply to the mere intention or willingness to acquire a relevant stake.
Exemption from mandatory offer
The QFMA may grant a temporary exemption from the obligation to launch a mandatory offer provided that the relevant person owns a stake not exceeding 78 per cent of the share capital, and the 3 per cent in excess of the 75 per cent threshold set out above is disposed of within three months of the date on which the excess percentage was acquired by that person.
Us antitrust enforcement: the year in review
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Foreign involvement in M&A transactions
While the two most widespread types of companies in Qatar are the LLC and the JSC, most foreign investors choose to do business in Qatar through an LLC form because of its lighter framework.
Through the establishment of the QFC, Qatar has promoted the country as a regional hub for international finance with the aim of attracting, inter alia, banking, financial services, insurance and corporate head office function businesses. As mentioned earlier, companies licensed by the QFC enjoy an array of commercial benefits, such as 100 per cent foreign ownership and a corporation tax rate of 10 per cent on all locally sourced profits. As a result, the QFC has seen a large number of international and regional banks, financial institutions and insurance companies open under the umbrella of the QFC Regulatory Authority.
Similarly, the QSTP and QFZA allow 100 per cent foreign ownership and for companies to sponsor foreign employees, resulting in the attraction of major international companies.
Foreign involvement in M&A transactions is largely governed by the New Foreign Investment Law. Under the Old Foreign Investment Law,9 the general rule was that foreign investors could invest a maximum of 49 per cent of the share capital of a Qatari company in all sectors of the national economy so long as the remaining 51 per cent of the share capital is owned by at least one Qatari partner.
The New Foreign Investment Law, which repealed the Old Foreign Investment Law, allows foreign investors to own up to 100 per cent of the share capital of a Qatari company, except in the case of banks, insurance companies and commercial agencies, and companies in any other sector that would be covered by a decision of the Council of Ministers. If a foreign investor wishes to hold more than 49 per cent of the share capital of a company, an application must be made to the relevant department at the Ministry of Commerce and Industry.
Pursuant to the New Foreign Investment Law, foreign companies can perform certain contracts in Qatar if a number of requirements are met, including the contract in question being performed through the foreign company's Qatar branch, and the contract being with a ministry, governmental agency, public body, institution or company in which Qatar is a shareholder.
Benefits offered to foreign investors include the freedom to repatriate profits as the foreign investors deem fit, tax exemptions and exemptions in relation to customs duties regarding the importation of necessary equipment and materials.
With regard to foreign involvement in publicly listed companies, as a general rule, foreign investors can own up to 49 per cent of the shares listed on the Qatar Exchange upon approval by the Ministry of Commerce and Industry of the specific foreign ownership threshold set in the articles of that company. Moreover, a foreign investor can own more than 49 per cent of the shares of a publically listed company upon approval of the Council of Ministers.
Significant transactions, key trends and hot industries
The key trend in M&A activity continues to be a focus on opportunities for Qatari investors in the global market. Qatar's most prominent outbound investors have continued to invest globally but with caution. This is mostly guided by the covid-19 pandemic continuing to affect most sectors globally, but also other factors such as Brexit
Financing of m&a: main sources and developments
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The Labour Law10 provides the main framework for employment law and applies to Qatari employers and workers. However, it does not apply to the following individuals:
- employees and workers of corporations and companies established by Qatar Petroleum;
- employees and civil servants and public bodies, including the ministries;
- officers and members of the armed forces, the police and the maritime forces;
- temporary workers; and
- individuals working in domestic employment (including, without limitation, drivers, cooks and gardeners).
The main government body responsible for individuals working in Qatar is the Ministry of Labour.
With regard to business transactions, the main applicable provision of the Labour Law provides that employees of a target company, and their employment-related rights, obligations and benefits under the relevant employment relationships, transfer to the acquiring company. In turn, and given that the approval of the Ministry of Labour is required to transfer the sponsorship of individual employees, the acquiring company and the target company must coordinate with the Ministry of Labour to transfer the employees to the acquiring company. Where approval is given, employment relations between the employee and the acquiring company (or the new company) continue without interruption, and the transferor and the transferee are jointly and severally liable for an employee's pay or other claims deriving from the employment relationship that have fallen due before the transfer. Finally, under the Labour Law, a transfer of business does not, in itself, constitute a legal ground to terminate any employment relationship.
i Trade unions
Although the Labour Law permits a single employees' committee to be formed by more than 100 Qatari employees employed by the same entity, trade unions are practically non-existent. The Labour Law requires minimum employee entitlements by which employers must abide, but can amend these if in favour of the employee.
Because of Qatarisation, whereby priority in employment is given to Qatari nationals, non-Qatari employees must demonstrate a need for their skills and the unavailability of a Qatari national to carry out the work, and acquire approval from the Ministry of Labour prior to commencement of the work.
Any provision in an employee's employment contract that provides that the employee may not work on any similar projects or for a company that is in competition with the employer must be reasonable, must not constitute an unreasonable restraint on trade, and must be appropriate to the circumstances of the employee's employment with the employer.
A valid non-compete provision should be confined in time and space to be reasonable. Regarding time limitation, the Labour Law, which had a two-year time limitation for non-compete provisions, was amended in August 202011 to provide for a one-year maximum limitation. Although the Qatar Labour Law does not apply to a QFC company, the new time limitation on onshore companies may have persuasive weight if the non-compete provision is challenged before QFC courts.
iv Pension arrangements and social security
Pension arrangements and social security are also regulated by the Labour Law: certain insurance and social security contributions for Qatari national employees are required. Moreover, pension schemes are allowed for foreign employees and may be elected by Qatari employees if they are more beneficial than the minimum benefits provided for by law.
Individuals require a valid residency permit and work permit, which may be applied for by an individual or an entity. In either case, the applicant is known as the worker's sponsor. Employees who hold a valid work permit must only perform work for their sponsors. Secondment of an employee to a third party requires approval from the Ministry of Labour and is often restricted in duration.
vi Immigration law
On 13 December 2016, the New Immigration Law12 regulating the entry, exit and residency of expatriates in Qatar entered into force, replacing the previous Immigration Law.13 The New Immigration Law provides notable changes, including the right for an expatriate working in Qatar to move between employers without the need for a non-objection letter from his or her existing employer (subject to the satisfaction of certain conditions), and appeals to a special committee, the Foreign Nationals Exit Grievances Council, in the event that the conduct of a current employer hinders or impedes the exit of an expatriate from the country.
The New Immigration Law has been amended by Law No. 21 of 2017. The amendments include expatriates' right to exit the country for holiday and emergency reasons, and to leave Qatar permanently prior to the expiry of an employment contract, in each case subject to giving prior notice to the employer.
Several immigration regulations have been issued in respect of covid-19 significantly restricting the entry and exit of expatriates in Qatar. These restrictions are not expected to be fully lifted until the covid-19 situation is settled.
Several taxes are worth mentioning in relation to the Qatari system: corporate income tax, withholding tax, capital gains and dividend tax, personal income tax, sales tax and double taxation.
The income tax system is subject to the Income Tax Law,14 under which a legal entity is considered a tax resident for tax purposes if the company is incorporated under Qatari law, is mainly located in Qatar or has its headquarters in Qatar.
A general flat tax rate of 10 per cent applies to profits arising out of taxable activity in Qatar, but a rate of at least 35 per cent applies to oil and gas operations.
Currently, withholding tax at a rate of 5 per cent is levied on all payments made to non-residents, including in relation to royalties and any other payments for services carried out wholly or partly in Qatar.
There is no capital gains tax or dividend tax on Qatari companies.
Similarly, personal income tax, sales tax and VAT are not imposed on operations in Qatar, although the Qatari authorities are still examining the possibility of introducing VAT.
Qatar is a party to treaties for the avoidance of double taxation with several countries, which provide an important incentive for foreign investors operating in Qatar.
Entities licensed under the QFC are subject to a flat rate of 10 per cent on local-source profit but are not subject to withholding taxes. Wholly owned government entities incorporated in the QFC are exempt from taxes.
In the same way, entities licensed by the QSTP are fully exempt from Qatari corporate income tax, while entities licensed by the QFZA can benefit from renewable 20-year corporate tax holidays.
Finally, with regard to the financial sector, a preferential tax treatment may be granted by the QCB to a merging company or a new company resulting from a merger.
Under the current legislative framework, there are no antitrust or merger control laws applicable to M&A transactions in Qatar. However, an antitrust culture is starting to emerge with the establishment of a De-monopolisation and Competition Protection Committee at the Ministry of Commerce and Industry, which has recently issued notices to large Qatari companies in relation to exclusivity and pricing matters.
Despite the fall in oil and gas prices in recent years and the impact of covid-19, the preparations for the FIFA World Cup in 2022 have continued apace, attracting a flow of inbound and domestic investments. Dealmakers are cautiously optimistic for the upcoming period, although market activity will largely depend on how long the covid-19 pandemic continues.
1 Michiel Visser and Charbel Abou Charaf are partners at White & Case LLP.
2 Law No. 22 of 2004.
3 Law No. 27 of 2006.
4 Law No. 11 of 2015.
5 Law No. 1 of 2019.
6 Law No. 13 of 2012.
7 Decree-Law No. 34 of 2006.
8 ictQATAR Decision No. 1 of 2009.
9 Law No. 13 of 2000.
10 Law No. 14 of 2004.
11 Law No. 18 of 2020.
12 Law No. 21 of 2015.
13 Law No. 4 of 2009.
14 Law No. 21 of 2009.